Tech stocks have been in a funk for much of this year, as investors steered clear of growth sectors in a down market. But some Wall Street banks have started making the case for buying into tech once again. Citi in an Oct. 7 note said it has upgraded tech to overweight from a “longstanding” underweight rating, as it shifts towards a preference for growth stocks. Similarly, Morgan Stanley said it was “double” upgrading EU tech stocks. “With investors likely to move back into growth stocks as and when the Fed starts to temper its rate hikes, we double upgrade EU Tech from underweight to overweight,” the bank’s analysts wrote in an Oct. 7 notes. Meanwhile, JPMorgan said in an Oct. 3 note: “After Value had another strong spell in Aug/Sept, we think that Growth style can pick up again, and Tech sector in particular. This is especially if yields do not move further higher from here.” Growth stocks, such as the tech giants, are particularly sensitive to rising rates as their valuations are based on future growth and cash flow. When interest rates rise, the value of future earnings is dragged down. Yields have shot up lately, but dipped before popping again on the US jobs report last week. Software, IT hardware Citi said that it was upgrading these tech sectors in particular: software and services, as well as tech hardware. It noted that software firms have seen resilient earnings per share, sales per share and cash flow per share. It listed these stocks as its top picks in those sectors: IT hardware: Contract electronics maker Jabil. Citi gave Jabil a price target of $80 – or nearly 33% upside. Software: Elastic, a company that commercializes open-source software for search and data analytics. In a separate Sept. 20 note, Citi gave Elastic a price target of $155 – or an upside of 115%. Morgan Stanley added: “We may be a bit early, but Software should be relatively defensive in any further sell-off, and valuations look reasonable now after EU Tech has posted its biggest underperformance since 2005.” Research firm MoffettNathanson also sounded the drum for software stocks, but cautioned: “We do not recommend buying entire positions immediately; rather we advocate averaging in over the coming months.” Semiconductors, payments While JPMorgan’s rating for tech is currently neutral, it said the sector could tactically trade better into the year end, adding that it’s “less excited on a medium term perspective.” JPMorgan is optimistic on two sectors in particular: payments and semiconductors. The bank’s basket of European growth stocks includes: chip firm ASML, Dutch payment firm Adyen and financial software provider Temenos.
